Is Dublin office market heading for a hard landing?

How worried should we be about the health of the Dublin office market?

It is widely accepted that office values — and commercial property values at large — are in a state of flux amid soaring interest rates, the rise of remote working and an assortment of other challenges. But some experts and commentators are sanguine about the outlook, given the expected rate of job creation in the future among other factors.

In light of the Irish economy’s recent performance, it certainly sounds like a compelling argument. It does also, however, sound suspiciously like the ill-fated “soft landing” narrative of a bygone era and, as such, is worth examining.

In 2007 and 2008, falling residential property prices were a preludeto the banking crash as reality set in for overleveraged Irish lenders who had fuelled a speculative bubble in the Republic’s housing market. A foreign crisis — the collapse of the US sub-prime mortgage market — was transmitted into the Irish banking and property sectors, exposing vulnerabilities that had built up over the previous decade.

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In the current environment, it is not unthinkable that another crisis could trigger some sort a similar chain of events domestically and commercially, rather than residential property, is seen as a weakness at the moment.

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But the two situations are not really comparable, at least according to the Central Bank of Ireland, particularly when it comes to the Republic’s main lenders. In its June Financial Stability Review, the bank rattled off the litany of woes putting “downward pressure” on the global commercial real estate market.

Importantly, it noted that Irish banks are relatively underexposed to the market. Commercial property loans accounted for just 10 per cent of total lending at last count, compared with more than one-third in 2008. Lending is now “less concentrated in riskier development exposures“, it said. Moreover, banks are also required to carry much higher levels of loss-absorbing capital, meaning they are now less likely “to amplify rather than absorb shocks” from abroad.

The non-bank sector is a different kettle of fish. The Central Bank warned that Irish property funds own about 34 per cent of estimated investable commercial real estate here, “a cohort” of which are vulnerable to falling prices due to their high levels of leverage.

If there is a crisis brewing, it could be some time before it comes to the surface.